You already have a lot going on in your business, but here’s something else to pay attention to: new small business tax changes. There are two changes in particular which could impact your bottom line. Blair Evans, IG Wealth Management’s director of tax and estate planning, helps break it down.
New income splitting rules
Paying out dividends to a family member who is in a lower tax bracket has been a longstanding way that incorporated small business owners have lowered their family tax bill. While the so-called kiddie tax rules have meant people under 18 would be subject to the tax on split income (TOSI) rules – non-salaried income received from a relative’s business would be taxed at the highest personal tax rate – now “the expanded rules apply to adults as well,” says Evans.
Exclusions may be available, says Evans. “If the amount is either from an excluded business, is from an excluded share, or if the amount is considered to be a reasonable return,” he explains.
The excluded share exemption applies to people 25 or older who hold shares directly (not through a holding company or trust) that represent 10 percent or more of the votes and value of the company. There are more rules around this: the business cannot be a professional corporation or a corporation that derives 90 percent or more of their business income from providing services.
Meanwhile, dividends can be excluded if they are deemed to be a reasonable amount. But age matters here, and the reasonable amount threshold is more stringent for those between the ages of 18 and 24, compared to those 25 and older.
Adults getting dividends can also be exempt from the TOSI rules if they are actively engaged in the business. “An individual will be considered to be actively engaged in the business if they work in the business at least an average of 20 hours per week throughout the year in either the current year or any five previous years,” says Evans. Just helping out periodically, however, won’t be enough.
Pay attention to passive income
For corporations with a calendar year end, the new passive income rules come into play in 2019.
The rules impact the corporation and any associated corporations. The first $50,000 of passive income will not impact the corporation’s small business deduction. But, for every dollar of passive income over that amount, the small business deduction gets reduced by $5. “As a result, once an associated group of companies earns $150,000 of passive income, their small business deduction for the following year will be reduced to zero,” says Evans.
While the rules come into effect next year, the reduction to the small business limit is based on the previous year’s passive income, he adds.
These new rules are complex, so business owners should consult with their financial planning team to make sure they’re doing their taxes correctly and planning ahead.